California’s Rebounding Restaurant Stocks

Sometimes investors can get a more accurate view of America’s economic health from local news outlets than big national papers or – dare we say it? – cable news networks. Those local outlets operate at ground level, and they often get the story first. In fact, it was by reading the Palm Springs Desert Sun and Modesto Bee, and not The Wall Street Journal, that Cramer discovered the turn happening in California.

While most of the media coverage of California has focused on the state’s budget and pension troubles, the local papers are telling a different story. They say the world’s eight-largest economy fighting its way back from the recession, and improvements are being seen in everything from retail and housing to the banks and commercial real estate. Hence Cramer’s weeklong focus on the state.

Today he covered California restaurant stocks, both fast food and casual dining. After all, if the economy there is picking up and people have money to spend, then they’re going to eat out. And the Palm Springs Desert Sunrecently published an article about how restaurant chains are still expanding in Southern California.

So which stocks do you buy? Cramer used to like CKE Restaurants , parent company of Carl’s Junior and Hardee’s, for fast food. CKE is up 55% since his May 22, 2009, recommendation, but with private equity sniffing around, he thinks Jack in the Box is the better buy.

JBX operates 42% of its 2,700 Jack in the Box and Qdoba Mexicn Grill locations in California, which puts the company in a sweet spot for the state’s rebound. And CEO Linda Lang has said the Golden State has stabilized and that her restaurants will see increased sales as the employment situation improves.

Jack in the Box is a national play as well, though, as the company plans to be a national franchise by 2013. At the same time, JBX wants to franchise more of its locations so that only 20% to 30% are company owned, down from 50% today. That would lower costs and boost the company’s cash flow.

For casual dining, Cramer likes California Pizza Kitchen and BJ’s Restaurants . Forty-two percent of CPKI’s locations are in-state, and he said that after three years of little action in the stock California Pizza Kitchen “could be truly ready to break out.”

As for BJ’s, the company on its most recent conference call touted positive same-store sales growth in some of California’s hardest-hit areas during the recession – the Inland Empire near San Bernardino, and Sacremento – for the fourth quarter of 2009. Plus, Cramer sees the potential for this company to more than triples its location count to 300 form 92. And while BJRI is at its 52-week high, he said, “it has one of the best charts I have ever seen.”

The recovery in California is real, Cramer said, and it’s going to trickle down to the restaurants stocks in due time. Actually, he’s so bullish about all the Cali-related plays he offered this week he thinks they “could become among the biggest winners of 2010.”